Weak income growth and high indebtedness pose challenges for many Singaporean households: ANZ

WEAK income growth, coupled with high levels of indebtedness, will post significant headwinds for many Singaporean households, and is likely to prompt the central bank to keep its neutral monetary policy stance, ANZ Research said on Friday.

ANZ economist, Ng Weiwen, highlighted a disconcerting development in Singapore the past two years where household consumption continued to fall below its long-term trend despite higher-than-expected growth in gross domestic product (GDP).

He noted that over the past twenty years, household consumption has fallen below its long-term trend only in times of recession or as a result of a major shock like in the aftermath of the 2008-09 global financial crisis.

"This trend is at odds with that in other countries where consumption has tended to remain relatively steady. In our view, the weakness is a manifestation of the structural challenges faced by the Singapore economy,'' he said, adding that the government's recent upbeat tone was largely predicated on improving external demand.

Household consumption is likely to stay weak in the near future, Mr Ng said.

"We believe that a combination of factors such as the sluggish labour market, trade-oriented growth, higher interest rates and declining housing asset to debt will pose significant headwinds for Singapore households.''

Domestically, the Singaporean household sector is caught in a bind with stagnant wage growth, job uncertainty and falling asset-to-debt ratio as prolonged property curbs continued to weigh on real estate prices.

"This has curtailed both the ability and willingness of households to spend, in our view," Mr Ng said. The share of mortgage in household debt in Singapore is now 77 per cent.

Concerns about rising household debt are exacerbated by slowing income growth and greater uncertainty over job prospects. Wage growth in the city-state was almost flat in 2016 and remained so year-to-date.

Stronger income growth is necessary to lift consumption, he said. Yet, wage growth has been practically flat in 2016 and year-to-date. Productivity has not picked up sufficiently to stimulate a corresponding and sustained increase in wages. Instead, labour productivity growth is trailing wage growth, translating into low profit margins, business closures, and lay-offs.

"Against such a backdrop, there is negligible risk of core inflation breaching the Monetary Authority of Singapore's (MAS) forecast corridor of 1-2 per cent for 2017. We therefore expect the MAS to maintain a neutral policy for a prolonged period.

"The neutral policy stance should, in turn, help to reduce the labour market stress arising from the government's on-going economic restructuring exercise.''